California Is Changing Its Tax on Cannabis
On July 1, 2022, the California Department of Tax and Fee Administration (CDTFA) issued a special notice regarding the end of the cannabis cultivation tax. Beginning July 1, 2022, the cultivation tax no longer applies to cannabis or cannabis products entering the commercial market in California. Per the CDTFA, cannabis enters the commercial market “when the cannabis or cannabis products pass the required testing and quality assurance review.”
Excess cultivation tax collected should be returned to the cultivator who paid it. If the excess cultivation tax can not be returned to the cultivator it should be reported on the distributor’s next cannabis return.
The CDTFA will provide guidance on how to report excess cultivation tax at a later date.
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Additionally, the mark up rate for arm’s length transactions was reduced to 75% beginning on July 1, 2022, through December 31, 2022. This rate is the markup between the wholesale cost and the retail selling price and is based on statewide market data. The mark-up rate is determined by CDTFA on a biannual basis in six-month intervals.
THE SPECIAL NOTICE ISSUED BY CDTFA SPECIFIES:
- Distributors and manufacturers (including microbusinesses authorized to distribute or manufacture) are no longer required to collect the cultivation tax from cultivators.
- Cultivators (including microbusinesses authorized to cultivate) are no longer responsible for paying the cultivation tax to manufacturers or distributors when cultivators sell or transfer cannabis to another licensee.
- Cultivation tax is not due on cannabis or cannabis products entering the commercial market on or after July 1, 2022, even if you received cannabis from a cultivator prior to July 1, 2022.
- Any cultivation tax collected on cannabis that enters the commercial market on or after July 1, 2022, must be returned to the cultivator that originally paid the cultivation tax.
What Should You Do If Excess Cultivation Tax is Collected?
- Cultivation tax that cannot be returned to the cultivator who paid it is considered excess cultivation tax collected.
- A manufacturer that has collected the cultivation tax and is not able to return it to the cultivator who paid it, must transfer the excess cultivation tax collected to a distributor to remit to the CDTFA.
- A distributor that has collected the cultivation tax and is not able to return it to the cultivator who paid it, must remit the excess cultivation tax collected to CDTFA.
- A distributor should report and pay any excess cultivation tax collected on their next cannabis tax return. Additional guidance on how to report excess cultivation tax on your cannabis tax return will be provided in a separate notice.
Make Sure You Are Keeping Accurate Records
Each licensee in a transaction should keep clear records to document when the cultivation tax was collected or not collected, returned to a cultivator, transferred to a distributor, or when excess cultivation tax was paid to CDTFA.
In an industry as heavily scrutineered as retail cannabis, it is important to stay apprised of changes to state tax laws as they rapidly evolve. For excise tax compliance solutions and consulting, turn to your trusted state and local tax advisors at REDW. We welcome your questions.
